Hong Kong Trader, 1 Dec 2011 –
Consumer and investment momentum held up reasonably well, driving the territory’s real GDP growth to 4.3% in 3Q11. However, external conditions have been deteriorating in recent months, whether the weakness in the external sector will spill over to other sectors is of particular concern.
For the coming year, the outlook is more uncertain. We expect a moderate slowdown in private consumption and investment growth, stable fiscal outlays from the government, but sharper downturn in net exports. Our base case is for Hong Kong’s GDP growth to revert to slightly below trend. We expect the economy to get off to a slow start next year and see risks of GDP growth drop below 4% in the first half. For 2012 as a whole, a growth of 4.0% is projected.
There are, however, risks to our forecast. The debt crisis in Europe may escalate, leading to further instability in financial markets and pushing the global economy into recession. Hong Kong is particularly vulnerable given its exposure to developments in the external sector.
Avoiding Recession by a Narrow Margin
Hong Kong’s economic growth in 3Q was moderately stronger than expected in spite of the ongoing sovereign debt crisis in Europe. Real GDP rose 4.3%, from a revised reading of 5.3% in 2Q and 7.5% in 1Q. On quarter-over-quarter basis, real GDP inched up 0.1%, following a 0.4% decline in the previous quarter, thereby avoiding a recession (typically defined as two consecutive quarters of contraction) by a narrow margin.
Consumer spending and capital investment were the main growth drivers. Private consumption surged 8.8% in 3Q, reflecting continued income growth amidst favorable labor market conditions. Investment advanced at a solid pace even as financial markets gyrated. Fixed investment rose 10.2% in 3Q, the biggest jump since 4Q09, supported by solid expansion of private investment in machinery and public spending on infrastructure projects. In contrast, net exports subtracted 4.1 percentage points from growth as demand in Hong Kong’s major markets weakened markedly.
Domestic Consumption will Slow
The outlook for the externally-oriented Hong Kong economy turns more challenging. Exports are set to remain sluggish as heavily indebted consumers and governments in advanced economies retrench to strengthen their balance sheets. Weakness in the external sector, and correction in the domestic equity and housing markets may put a further drag on local consumption and investment growth.
Nevertheless, the slowdown in consumer spending is likely to be moderate as there are positive factors underpinning demand:
Relatively tight labor market: Payrolls increased by an average of 9,000 per month over the last two quarters. The recent pickup in the unemployment rate reflected a reduced hiring rate rather than a jump in layoffs. However, if the current trend continues, we are likely to see a gradual and steady rise in the unemployment rate.
The government is expected to dole out one-off giveaways and subsidies: The one off payment of HK$6,000 for local residents may boost domestic demand towards the end of the year and into early 2012. The government is likely to unveil more fiscal stimulus in the coming Budget, as the balance of risk has shifted from inflation to lower growth.
Supportive monetary conditions: As the US Federal Reserve will keep its policy rate on hold throughout next year, Hong Kong’s interest rates would also remain at low levels under the linked exchange rate regime. Accommodative monetary conditions could therefore lend further support to consumer sentiment.
Impacts of negative wealth effect are limited: The impacts of the global financial market volatility and the sluggishness of property sector transactions in Hong Kong could start to bite into consumer confidence. To gauge the potential impact of wealth effect, the European Central Bank estimated in a Working Paper in January 2009 that if property and stock prices in Hong Kong declined by 10% and 25% respectively, the negative wealth effect would knock one percentage point off the private consumption growth in short run. As such, unless investment sentiment deteriorates materially, declines in asset prices might have only limited impact on local consumers.
Hong Kong Economic Monitor (December 2011). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Economic Research Department, G.P.O. Box 2985, Hong Kong.